Predicting Bankruptcy Using Neural Networks in the Current Financial Crisis: A Study of U.S. Commercial Banks

33 Pages Posted: 28 Nov 2010

See all articles by Félix J. López-Iturriaga

Félix J. López-Iturriaga

Universidad de Valladolid - Department of Finance and Accounting

Óscar López-de-Foronda

University of Burgos - Department of Economics

Iván Pastor-Sanz

University of Burgos

Date Written: November 28, 2010

Abstract

We develop a model of neural networks to study the bankruptcy of U.S. banks. We provide a new model to predict bank defaults some time before the bankruptcy occurs, taking into account the specific features of the current financial crisis. Based on data from the Federal Deposit Insurance Corporation, our results corroborate that distressed banks undertook higher credit risks and were more heavily concentrated on real estate. Interestingly, the distressed banks do not show lower cost efficiency than their wealthy counterparts, suggesting that bank failures are a consequence of careless bank strategies rather than low cost efficiency. After drawing the profile of distressed banks, we use our model to predict future bankruptcies and test the performance of the model by comparing our predictions with the actual bankruptcies between January-June 2010. Our model shows a high discriminant power and is able to differentiate correctly wealthy and distressed banks. Specifically, our model would have been able to predict in December 2009 around 60% of failures that occurred in the first six months of 2010.

Keywords: Banks, Bankruptcy, Financial Crisis, Neural Networks

JEL Classification: G21, C45, G33

Suggested Citation

Lopez-Iturriaga, Felix Javier and Lopez de Foronda, Oscar and Pastor-Sanz, Iván, Predicting Bankruptcy Using Neural Networks in the Current Financial Crisis: A Study of U.S. Commercial Banks (November 28, 2010). Available at SSRN: https://ssrn.com/abstract=1716204 or http://dx.doi.org/10.2139/ssrn.1716204

Felix Javier Lopez-Iturriaga

Universidad de Valladolid - Department of Finance and Accounting ( email )

Avda. Valle Esgueva 6
47011 Valladolid
Spain
+34 983 184 395 (Phone)
+34 983 183830 (Fax)

Oscar Lopez de Foronda

University of Burgos - Department of Economics ( email )

Plaza Infanta Elena
E09001 Burgos
Spain

Iván Pastor-Sanz (Contact Author)

University of Burgos ( email )

Hospital del Rey, s/n
Burgos, 09001
Spain

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